Obama’s urge for ‘big deal’ on taxes is misguided

Commentary: The voters didn’t ask for tax reform

WASHINGTON (MarketWatch) — The good news is that it doesn’t look like there will be a “grand bargain” on taxes before the end of the year.

In his press conference Wednesday, President Barack Obama suggested that Democrats and Republicans agree to extend tax cuts for the middle class in time for Christmas shopping and tackle other issues in the new year.

That leads us to the bad news: The newly re-elected president still wants “comprehensive” tax reform. He wants a “big deal” on taxes and is “open to new ideas.”

Reuters

President Barack Obama insists on more tax revenue from wealthy Americans, and says he’s open to new ideas on how to get it.

There aren’t really too many new ideas out there, and to the extent it means big changes to individual income tax, comprehensive tax reform is a bad idea. There’s nothing substantially wrong with our tax system except that the rates are too low to be sustainable.

As it stands now, our system of individual income tax is very progressive. Repeated OECD studies have shown it is one of the most progressive among industrial economies. See the OECD data.

Any effort to overhaul it is almost certain to make it more regressive — that is, increasing the tax burden for middle and lower incomes while easing it for high earners.

For instance, the proposal to cap deductions — the flavor of the week in Washington — is a particularly bad old idea.

For one thing, even though it’s claimed that this will affect high earners more, it clearly won’t hit them as hard as just raising the tax rates back to where they were under President Clinton, or the Republicans wouldn’t be pushing it.

It was a key piece of the tax proposals championed by Republican presidential nominee Mitt Romney, who, you will recall, lost the election.

Capping deductions will make it very difficult ever to raise rates again. The deductions are the way we ease the tax burden on the middle class. It is the way we use tax policy to encourage economic behavior.

It seems counter-intuitive to cap mortgage deductions and dampen home purchases just when we need a revival of the housing market to buoy the economy. Any form of cap on deductions is likely to bankrupt many charities.

No voter has asked for a cap on deductions or comprehensive tax reform. To the extent that substantial tinkering with our current system was proposed, it was rejected.

And yet, Obama seems willing to entertain this kind of proposal and some of those “centrist” Democrats, like Sen. Kent Conrad of North Dakota — you know, he who stalled and needlessly complicated the health-care reform — think it might be a good “bipartisan” solution.

In this political climate — and there is no evidence that the election has changed it — bipartisan usually means Democrats caving in to Republicans.

This is why labor leaders and other progressives are wary about Obama’s intentions, seizing upon some of his ambivalent comments to create a narrative that he will not cave in this time.

They are right to worry. A report in the New York Times just the day after the election described how Obama has been preoccupied from Day One with his place in history, inviting presidential historians to regular meetings at the White House to discuss how he can be an Abraham Lincoln or a Franklin Roosevelt.

This self-reflective focus on carving out a niche in history comes dangerously close to the narcissism Obama’s critics sometimes accuse him of. “It was almost as if he was writing his own history book about himself,” the Times quoted Stanford professor David Kennedy as saying about the meetings. Read the Times report.

Lincoln and Roosevelt rose to greatness by focusing on the huge crises history handed them, not by conferring with historians on how best to make their mark.

Now it seems Obama has comprehensive tax reform in his sights as part of his legacy, along with health-care and perhaps immigration, even though, unlike with those two issues, the public is not asking for reform on taxes.

He appears to see tax reform as a way to finally achieve that elusive, and probably chimerical, dream of being the president who can unify the country in a grand bipartisan deal in the face of all evidence that this is neither the time nor the place for that kind of compromise.

The solution to the deficit is actually a good deal simpler. Raise tax rates on higher earners now, restore the other brackets to their levels under Clinton when the economy improves and chances are good the federal government will once again run a surplus as it did then.

If you’re dead set on tax reform, leave individual income taxes alone and overhaul corporate taxes. Lowering the tax rate in the corporate sector, closing loopholes and curbing subsidies would truly increase revenue, forcing giant corporations to pay much more while giving a fairer shake to smaller companies that don’t benefit from all the tax dodges.

Yet the Republicans are curiously silent about this reform. They are likewise silent about raising the capital gains tax, or eliminating carried interest for hedge-fund managers, or other obvious ways to increase revenue without burdening the middle class.

Since Obama and the Democrats seem resolutely reactive rather than proactive in this debate, the focus continues to be on the Republican obsession with individual income tax rates.

But maybe former vice presidential nominee Paul Ryan got it right when he said this week that Americans voted for “divided government” by returning a Republican majority to the House.

In that case, political gridlock may continue to block any “comprehensive” reform and Obama can show that he means what he says about not cutting rates for the wealthy.

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